The second equation of exchange is__________

Analyze the question: It asks for the "second equation of exchange" in monetary economics, which is part of the Quantity Theory of Money.

Explain the concept: There are two well-known versions of the equation of exchange:

1. Fisher's (transactions) equation: MV = PT • M = money supply, V = velocity of circulation, P = price level, T = volume of transactions/trades.

2. Cambridge (cash balance) equation: M = KPR (or equivalently M = kPY) • K = the proportion of income people prefer to hold as cash, R = real resources/income (total output), P = price level. • Making P the subject: P = M/KR

In Nigerian textbooks, the Fisher equation is commonly called the first equation of exchange, and the Cambridge equation is the second.

Solution:

• Option A: MV = PT is Fisher's equation, the first equation.
• Option B: P = M/KR is the rearranged Cambridge equation (M = KPR), the second equation.
• Option C: P = MV/T is just Fisher's equation rearranged for P, so it still belongs to the first.
• Option D: P = MV is incorrect, since T is missing.

Answer: The correct option is B. P = M/KR.

Tip: Remember "Fisher is First, Cambridge is Second." If you see K and R in an equation, think Cambridge, which is the second equation. If you see V and T, think Fisher, the first.